Is Fastly Stock A Buy?

Is Fastly Stock A Buy? Fastly, Inc. [NYSE: FSLY], which is headquartered in San Francisco, CA, provides real-time content delivery network services. The company offers edge cloud platform, edge software development kit (SDK), internet security services, image optimization, video, cloud security, load balancing, and streaming solutions.

The platform is designed to take advantage of the modern internet, to be programmable, and to support agile software development. Fastly’s services hastens up data delivery through its edge computing and content delivery network (CDN).

The customers of Fastly, include many of the world’s most well-known companies, including Vimeo, Pinterest [PINS], The New York Times, Shopify [SHOP] and GitHub. The company was founded by Artur Bergman, Simon Wistow, and Gil Penchina in March 2011 and went public in 2019.

The Covid-19 enforced lockdown led to a huge surge in Fastly’s traffic with both, the revenue and stock price of the cloud services provider, soaring to new altitudes. Here, we look at whether the surge is sustainable and if Fastly is a good investment.

Is Fastly Stock a Buy?

The world was surprised by and unprepared for the pandemic, which put it into an unprecedented deep freeze. On the investing front, cloud computing services provider Fastly, too, had some surprises in store for investors.

Fastly, within a very, very short span of 25 days, was totally decimated, losing more than 50% of its value. The fear that triggered the sell-off was not off the mark as a large number of businesses were forced to institute work-from-home orders to keep the spread of coronavirus in check.

Panicky investors went into a selling frenzy, fearing the demand for Fastly’s services would take a severe beating as IT departments adopted new cost-cutting measures to deal with the slowdown. Fortunately, for Fastly, what actually happened was very different.

The company, in a stunning reversal of fortunes, since then witnessed its stock gaining more than 650% to become one of the best performing stocks of 2020. Some investors, as such, may well feel that they they’ve missed the boat. 

They may wonder whether they should add such an exceptionally performing stock to their portfolios right now, or whether they have missed a golden opportunity of benefitting from its brilliant run.

Fastly Has World Renowned Customers

Fastly, true to its name, helps companies quicken the speed of their internet traffic through its state-of-the-art computing and content delivery network (CDN).

The company’s edge cloud platform is the outcome of servers placed at strategic geographic locations, which accelerate response time to make the internet faster and more secure, ensuring customer websites, photos, videos and more are delivered in a timely and secure manner.

This has helped Fastly grow its client base and revenue as strict lockdown measures and shelter at home policies require the internet to keep running smoothly and safely.

While Fastly isn’t a household name yet, it is trusted by some of the most recognizable brands in the world including Pinterest [NYSE: PINS], Shopify [NYSE: SHOP], Spotify [NYSE: SPOT] and The New York Times, to name just a few. Fastly’s technology platform speeds up hundreds of billions of request each day. The company handles over 800 billion requests per day and enjoys a customer satisfaction rate of more than 95%.

Fastly’s products are reliable and trustworthy, as demonstrated by Amazon’s [NASDAQ: AMZN] use of Fastly’s CDN to load images on its homepage rather than its in-house CloudFront. Fastly also has partnerships with Alphabet’s [NASDAQ: GOOGL] Google Cloud Platform.

It has achieved something of a cult status within the developer community which should not come as a surprise since in the words of its CEO Joshua Bixby, it is a “system built by developers for developers.”

Solid Quarterly Results & Strong Growth Prospects

Management considers that the market for edge computing and CDN is large and growing. The company estimates that the total addressable market opportunity could be worth $35.8 billion by 2022, growing at a CAGR of roughly 25%.

These kinds of estimates are generally overblown by the management, and are most certainly likely to carry a certain degree of error.

However, impressive quarterly results of the company demonstrate that Fastly is benefitting from growth that is accelerating. Additionally, the digital transformation induced by COVID-19 is likely to strengthen Fastly’s long-term prospects.

Fastly generates revenue from charging customers based on their usage of the platform and, in the latest quarter, revenue increased by 38% to $63 million. Fastly’s dollar-based net expansion rate was 133%, indicating that customer spending went up by 33% compared to the same period last year, a positive indicator of the company’s ability to deliver value to those customers.

On an annual basis, its average customers spending has increased by 20% annually from 2014 to 2019. In the last two quarters, the average customer has increased their spending from $607,000 to $642,000, with the company increasingly focusing on growth through a “land and expand” strategy.

Also, on a non-GAAP (adjusted) basis, the company successfully cut its losses by about 80%, partly owing to its increasing base of enterprise customers which clocked an impressive growth of 22% year over year.

Fastly’s business looks stronger than ever, which, in turn, gave the management the confidence to raise its guidance for the full year 2020. Fastly increased revenue guidance to the range of $280 million to $290 million from the earlier forecast of $255 million to $265 million.

Risks of investing in Fastly

Fastly seems to be currently firing on all cylinders, but a young company with high growth potential always carries a significant amount of risk with it.

The company is also operating in a highly dynamic landscape and the competition is fierce.  At this stage, tough competition first, and lack of profitability a distant second, are the two primary risks that Fastly has to contend with.

As far as Fastly’s growth opportunities are concerned, it hinges to a large extent on its edge computing solutions. The company boasts outstanding technologies in this area but, nevertheless, has larger and more resourceful rivals snapping at its heels.

Under such circumstances, it is imperative for the company’s success to keep ahead of its rivals through continuous technological innovation.

Failure on the part of Fastly to do so will cause the whole bullish thesis to crash down like a pack of cards.

Fastly is also losing money at this stage. It ended the quarter with a loss of $12 million. However, what could be reassuring to shareholders is that the company is making good progress in this area.

The management remains upbeat about the prospects reaching profitability in the medium term, though time will be the best judge of the management’s optimism.

Also, the stock has had a subdued run for over the past several months, before reaching new heights, thanks to much better than expected earnings and increased guidance from the management.

Are Fastly competitors a threat?

The company has outstanding technologies in this area, but it also faces tough competition from several behemoths in the CDN space, most notably companies such as Akamai Technologies [AKAM], Cloudflare, Limelight Networks, Microsoft, and Amazon among others.

Many of these competitors are much larger companies with huge amount of resources at their disposal and more mature intellectual property.

Analysts generally have a simplistic view of competitive dynamics. A company competing with large rivals does not mean it will bow out of the race sooner than later. On the contrary, a motivated and focused smaller player can deliver highly innovative solutions boasting higher technological superiority and better speed and flexibility.

Also, when the market is large and expanding, it provides ample space for smaller fishes to swim alongside the larger ones. Fastly’s developer-friendly network management tools and its edge computing services have helped the company carve a distinct niche for itself in the CDN space.

Having said that, the company has no room for error and cannot ever let its guard down if it is to successfully compete with its rivals.

Is Fastly Stock a Buy: The Bottom Line

Investors cannot be blamed for experiencing sleepless nights in the current uncertain economic environment. But there are certain businesses that are profiting immensely from the chaos unleashed by the pandemic.

Fastly has been witnessing a huge surge in demand over the short term, courtesy social distancing measures, but the company’s growth engines are ultimately supported by long-term drivers. Fastly offers abundant potential in the years ahead, thanks to its partnership with companies whose long-term prospects look bright.

The stock is trading at new highs, partly due to its stratospheric rise over the past several months. However, valuation should not be a cause of concern as experts feel the stock price is not excessive at all in comparison to the abundant potential for growth the company offers in the years ahead.

Analysts expect Fastly to increase its sale by over 40% in the current year, and nearly 30% next year, not an impossible feat given the fact that Fastly has always exceeded expectations.

To sum it up, Fastly undoubtedly is a high-risk investment, but the company has ample room for long-term growth and profitability augmentation.  If you have a lot of patience, are not easily rattled, are perfectly willing to pay for quality and have the stomach for volatility, Fastly should definitely be on your radar.  

---

The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.